Housing wealth effect, Baker, Goldfarb and Waldmann

by Robert Waldmann Everything is possible and I think that Dean Baker just lost a debate with a Washington Post reporter. Post reporter Zachary A. Goldfarb wrote The two economists compared what happened in U.S. counties where people had amassed huge debts with those where people had borrowed little. It had long been thought that when property values declined in value, homeowners would spend less because they would feel less wealthy. But Mian and Sufi's research showed something more specific and powerful at work: People who owed huge debts when their home values declined cut back dramatically on buying cars, appliances, furniture and groceries. The more they owed, the less they spent. People with little debt hardly slowed spending at all. among other things. The link is his. Dean Baker wrote The housing wealth effect is one of the oldest and most widely accepted concepts in economics. It is generally estimated people spend between 5 and 7 cents each year per dollar of housing wealth. This means that the collapse of the bubble would be expected to cost the economy between $400 billion and $560 billion in annual demand. among other things Again the link is his. Baker's main point is that low consumption by underwater home owners is not a plausible explanation of the sluggish recovery. However, he also confidently asserts that the housing wealth effect is linear based on "google it". I think that he has decided that new empirical research is irrelevant, because he already knew how economies work.My comment below the fold.In the comment I define your disagreement with post reporter Zachary A. Goldfarb as a disagreement about whether reduced but still positive home equity causes a reduction of consumption on the order of between 5 and 7 cents each year per dollar of housing wealth or on the order of zero. That is, I won't address you valid points that the recovery of consumption was roughly normal while the recovery of house construction was not. Notably Goldfarb cites empirical estimates based on micro data. He claims there is a significant change in the slope of the home equity effect on consumption at home equity equals zero. To say he is wrong, you must convince me that the 5 to 7 % estimate is valid for a sample containing only homeowners with positive equity. An estimate with aggregate data just does not address the claim in the article which you criticize. Notably, in this case the Washington Post cites specific research by named economists. You, in contrast, cite what all macroeconomists know. I am shocked to find that I call this one for The Washington Post. Your conclusion may be correct, but your reasoning is based on the assumption that all functions are linear. I don't like to be square, but that's not true. cross posted with Robert's Stochastic thoughts